Introduction
Last December, Vanguard launched two ETFs. The Vanguard Core-Plus Bond ETF (NASDAQ:VPLS) is one of them and the one covered in this article. A prior article reviewed the other new ETF, the Vanguard Core Bond ETF (VCRB). I will cover how the two might differ in their approach to investing in the US and International bond markets as part of this article. Like VCRB, VPLS is too new to rate as a Buy, but also worth keeping an eye on and comparing its results against similar ETFs.
Vanguard Core-Plus Bond ETF review
Seeking Alpha describes this ETF as:
The investment seeks to provide total return while generating a moderate to high level of current income. The fund invests in fixed income securities of various maturities, yields, and qualities. Under normal circ*mstances, the fund will invest at least 80% of its assets in bonds, which include fixed income securities such as corporate bonds; U.S. Treasury obligations and other U.S. government and agency securities; and asset-backed, mortgage-backed, and mortgage-related securities. Benchmark: N/A. The ETF started on 12/7/23.
Source: seekingalpha.com VPLS
VPLS started on 12/7/23 and is classified as an Intermediate-Term Bond. The ETF has $103m in AUM and despite being actively managed, the fees are just 20bps. The ETF shows a 5% SEC Yield, but that sometimes overstates what investors see.
Highlights from Vanguard’s description include:
- This actively managed fund seeks to provide broadly diversified exposure primarily to the U.S. investment-grade bond market, with selective exposure to below-investment-grade bonds and debt from other countries, including emerging markets.
- Investments in U.S. Treasury, mortgage-backed, and corporate securities, and emerging markets debt of varying yields, maturities, and credit qualities are permitted.
- Using a disciplined, risk-controlled approach, the fund seeks to outperform its benchmark through security selection, sector allocation, and duration decisions.
- The Core-Plus Bond ETF is a standalone product and is separate and distinct from the Vanguard Core-Plus Bond Fund (VCPIX and VCPAX).
Holdings review
Ratings and maturities are two important data points for any bond ETF. First, I looked at VPLS's ratings.
Only 11% of the portfolio is in bonds below investment-grade, with over 60% in US Government debt. The next chart shows that is all in US Treasuries.
This equates into a 10.2-year average effective maturity and a 6.2-year average effective duration. With 18% maturing within a year, a large part of the portfolio will be available to potentially buy higher coupon bonds than those maturing. Next factor to understand is the asset sectors held and in what weightings.
Top holdings
Even with over 560 positions, these holdings account for more than 20% of the total portfolio allocation.
With UST Notes dominating the list, not much can be derived about the corporates held. Interested readers can see online what the ETF holds, page by page. While reviewing all 333 ten-at-a-time would be tedious, they did breakout the derivatives held.
The fact the ETF holds currency futures tells me they chose to hedge some/all their currency risk. They are also short several bond futures, a strategy usually employed to manage interest-rate risk.
Distributions review
Based on the last payment continuing, the yield would be 3.9%.
ETF strategies compared
The next table compares the new ETFs are important factors.
Factor VPLS VCRB AUM $103m $109m Fees 20bps 10bps SEC Yield 4.99% 4.82% % below BBB 11% 3% Average coupon 4.1% 3.8% YTM 4.9% 4.6% Effective maturity (yrs) 10.2 10.1 Effective duration (yrs) 6.2 6.3 # of bonds held 563 333
The only real difference I saw in strategies was the maximum allowed in non-investment-grade bonds: 35% for VPLS; only 5% for VCRB. That said, there are differences in what asset classes are held.
Asset Class VPLS VCRB Treasury/Agency 35.6% 47.6% Govt Backed Mortgages 22.2% 20.5% Industrial 13.9% 10.7% Finance 10.8% 8.8% Foreign 10.0% 4.7% Utilities 4.3% 4.3% Other 1.7% .9% Asset-Backed 1.5% 2.5%
VPLS is less dependent overall on government-backed debt than VCRB is. The other difference that stands out is the foreign exposure, some of which could be in non-USD bonds.
Conclusion
As stated above, both ETFs are too new to rate anything higher than a Hold. Unless one wants to minimize sub-BBB bonds and/or foreign bonds, I currently would prefer VCRB just based on its lower fees. Both ETFs have three portfolio managers, two of which are assigned to both ETFs.
Portfolio strategy
An important common feature is the fact that both ETFs are not tied to a bond index when setting their asset weights. Both operate with some limits on sector weights and have a dollar-weighted average maturity between 4 and 12 years, though deviations are permitted if the market conditions warrant it.
With rates back to what was normal before the FOMC pushed them near zero, dividing one's fixed income allocation between CDs, bond funds that match the investor's risk profile, and individual bonds that lock in the YTM (assuming no default) is a strategy to consider.
Alex Pettee is President and Director of Research and ETFs at Hoya Capital. Hoya manages institutional and individual portfolios of publicly traded real estate securities. Alex leads the investing group known as the Hoya Capital Income Builder, which uses the investment knowledge of several Seeking Alpha analysts provide members with insightful articles covering mostly individual stocks or funds. Occasionally an article cover will cover an investing strategy or other topic that investors need to be aware of, such as law changes that might effect their long-term strategy.
For more information about this Investors Group, click on this link:
https://seekingalpha.com/instablog/1723581-hoya-capital/5350609-retired-investor-teams-up-income-builder
